Pages

Tuesday, September 29, 2015

Lending Restrictions

Worried about
what trouble your future Board might create?
A great way to lock in good governing habits is with a bank loan. Yes, a bank loan. All those restrictions for an Association loan
guarantee that no funny business will be happening under someone else’s watch. Just make sure the loan includes the
following:

The 'proxy put' This provision allows the lender to
immediately call the loan due if a majority of the Association's Board of
Directors becomes filled with 'non-continuing Directors' that were not approved
by the original Board members. Take it a
step further to a 'dead hand proxy put', which prevents current Directors from
bestowing 'continuing director' status to any new directors seated via a
contentious election.

Governing Amendment The lender
holds veto power over any changes to community regulations. That smoking ban will just have to wait.

Annual Audits No, the treasurer did not pay
for that Porsche with community funds.
Conspiracies are a thing of the past, when you’re required to have a CPA
touch the books every single year.

Insurance coverage No corner-cutting here. Great way to ensure that D&O insurance,
fidelity, and workers comp coverage - the three coverages that typically get neglected - are fully in
place.

Self-Managed? No way. That lender is going to have the last say on
any changes in professional management.
And self-managed always turns out to be more costly in the long run.

First priority asset status This allows
the bank to have first dibs over any money or property the Association holds or
might hold in the future. Since HOAs
rarely actually own real estate, the next best thing is having rights to all
future assessments paid by homeowners.

Collections The days of “going easy” on deadbeats are
over. Your banker expects the community
to hit delinquent behavior with both barrels.
Absolutely no write-offs of debt without prior approval! Best of all, if the delinquency rates slip
above 10%, the note is called due.

Cross Default Not cross-dressing, but close. If the Board stiffs the plumber, it’s an automatic bank loan default.

It is also a default for any other creditor to have the ability to elect
a majority of the members of the Board.

The point is
this: Requirements like those above have
ramifications most of us never guessed existed, so be careful navigating past
potential problems. When your community
obtains a bank loan for a major renovation/repair project, be sure your
attorney is heavily involved.